Maiden Holdings, Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are U.S. dollars in millions unless stated otherwise. The company is primarily in run-off and is not actively underwriting reinsurance; it continues limited primary insurance and reinsurance-related operations.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $44.7 | $189.9 | $103.9 | $394.8 |
| Net income (loss) | $9.2 | $(15.4) | $30.1 | $(52.0) |
| Net premiums earned | $21.3 | $134.0 | $52.5 | $317.1 |
| Net investment income | $14.3 | $31.1 | $32.3 | $63.1 |
| Underwriting result | $(0.02) | $(39.1) | $(3.7) | $(81.8) |
| Combined ratio | 131.8% | 136.1% | 131.7% | 132.5% |
| Operating cash flow | Not presented quarterly | $(419.2) | $(503.7) |
- Basic and diluted earnings per common share were $0.11 in Q2 and $0.35 for the first half, versus losses of $0.19 and $0.63 in the comparable 2019 periods. 2019 included discontinued-operation losses; 2020 did not.
- Q2 underwriting was approximately break-even on the company’s reported measure, but the combined ratio remained above 100%, indicating underwriting expenses exceeded earned premium and other insurance revenue. The first-half underwriting loss was $3.7 million.
- First-half GAAP net income includes $19.9 million of realized investment gains, a $1.5 million other-than-temporary impairment charge, and $5.9 million of foreign-exchange and other gains. Non-GAAP operating earnings were $1.2 million for Q2 and $4.4 million for the first half; these exclude specified investment, currency, run-off and other items and are not GAAP measures.
- Net investment income fell 54% in Q2 and 49% in the first half, principally as average investable assets declined 38% and 36%, respectively, and average book yield fell to 2.3% and 2.5% from 3.1% in both prior-year periods.
- At June 30, total assets were $3,213.4 million, total liabilities $2,682.7 million, and shareholders’ equity $530.7 million. Loss and LAE reserves were $2,071.2 million, down $368.7 million from year-end 2019. Common shareholders’ equity was $65.7 million; preference shares totaled $465.0 million.
- Senior notes principal was unchanged at $262.5 million; carrying value was $255.0 million. Debt was 33.1% of total capital resources, compared with 34.1% at year-end. The notes carry coupons of 6.625% and 7.75%; reported interest and amortization expense was $9.7 million for the first half.
- Cash and cash equivalents were $56.6 million and restricted cash was $80.9 million. Total investments were $1,475.6 million. Management reported $401.8 million of unrestricted cash and fixed-maturity investments and said available liquidity was adequate for the next 12 months.
- Fixed maturities had a fair value of $1,439.6 million; 97.6% were investment grade. First-half operating cash use of $419.2 million was largely offset by $448.0 million of investing cash inflow, mainly investment sales and maturities; cash, restricted cash and equivalents increased by $30.2 million.
Material changes versus the prior period
- Revenue and earned premiums contracted sharply as AmTrust quota-share agreements were terminated effective January 1, 2019 and the related business continued to run off. First-half net premiums earned fell 83% year over year. 2019 written-premium figures were unusually affected by large return-premium adjustments associated with the termination; they are not directly comparable to ordinary new-business production.
- Net income improved from losses in 2019, reflecting much lower underwriting losses and favorable prior-year reserve development, as well as the absence of 2019 discontinued-operation losses. First-half prior-year development was favorable by $0.6 million, compared with adverse development of $33.3 million in 2019.
- The improvement in underwriting losses did not produce underwriting profitability overall: reported combined ratios remained above 100%. Diversified Reinsurance’s combined ratio was 103.2% in Q2 and 104.3% for the first half; AmTrust Reinsurance’s was 96.3% and 109.3%, respectively.
- Investable assets and the investment portfolio declined as the company paid run-off claims. Unrestricted cash and fixed maturities fell from $435.0 million at year-end to $401.8 million. Restricted cash and investments used as collateral totaled $1.2 billion, down from $1.5 billion.
- On March 16, 2020, Maiden Reinsurance re-domesticated from Bermuda to Vermont; the parent holding company remains Bermuda-based. Collateral requirements for AmTrust arrangements were strengthened in connection with the change.
Outlook, commentary and risks
- Management expects materially lower written premiums and continued negative operating cash flows as the company runs off liabilities; it expects this trend to continue through the rest of 2020 and beyond. It expects to fund claims and expenses from cash and investments, premiums collected, investment income, and investment-sale or maturity proceeds, and expects overall cash flows to remain sufficient.
- Management is evaluating its operating strategy and capital allocation. It said current reinsurance-market opportunities may offer more limited risk-adjusted returns than other initiatives. No specific earnings, revenue or underwriting guidance was provided.
- The company’s LPT/ADC agreement with Enstar affiliate Cavello covers certain AmTrust reserves, including up to $155 million of adverse development cover above carried reserves, subject to agreement terms and limits. The deferred gain liability was $111.5 million at June 30; management estimates amortization will not begin until losses paid exceed the minimum retention, currently estimated in 2024. Adverse reserve development could affect results before deferred-gain recognition.
- COVID-19 created uncertainty around investments, claims, liquidity and regulatory capital. Maiden reported limited, immaterial COVID-related claims to date in its primary-insurance unit and no COVID claims received by Maiden Reinsurance, but said estimates could change materially. Market volatility, lower yields, additional collateral needs, regulatory capital demands, and reduced subsidiary dividend capacity could constrain liquidity.
- Other risks include reserve-estimation uncertainty, reinsurer and related-party credit exposure, foreign-exchange exposure (no hedges were in force), investment-credit and concentration risk, and collateral requirements. The company had $617.5 million of reinsurance recoverables on unpaid losses and substantial balances involving AmTrust and Enstar-related arrangements.
- A securities class action filed in 2019 and amended in May 2020 alleges inadequate AmTrust-related loss reserves and securities-law violations; the company says it will defend the claims. A separate former-executive whistleblower matter remains ongoing. Management says the outcome and potential effect of the class action are uncertain.
- No common or preference dividends were paid in the first half, and the board had not declared dividends since Q4 2018. The company regained compliance with Nasdaq listing requirements in June 2020.
Important facts for investors to verify
- Whether continued claims payments and reserve development, especially in AmTrust-related run-off, remain consistent with carried reserves and reinsurance recoveries.
- The collectability, collateral coverage and timing of recoveries under the Enstar/Cavello LPT/ADC agreement, including the deferred gain and expected amortization timeline.
- Liquidity available after considering restricted assets, ongoing negative operating cash flow, claim payments, and any increased collateral or regulatory capital requirements.
- Investment portfolio credit quality, unrealized losses, lower yields and concentration exposure, including the effects of COVID-19 market conditions.
- The company’s progress toward a sustainable strategy and underwriting or investment profitability, given combined ratios above 100% overall and no formal financial guidance.
- Developments in the securities litigation and whistleblower matter, as well as the effects of the Vermont re-domestication and strengthened collateral terms.